January 26, 2016
If the mass media is to be believed, Africa is hardly a continent brimming with opportunities for business. But for some time international business commentators have been positioning the continent as the next market with significant potential. It is now often described as being ready to take on the mantle of Asia where growth is slowing, markets are becoming crowded and internal competition is becoming more severe.
China has anticipated this potential by making extensive investments in Africa. Between 2003 and 2011, its total investments have increased thirty fold, from US$491 million to $15 billion.
Africa’s traditional trading partners from Europe, the UK and France have been left behind. China is the top bi-lateral trading partner with trade volume exceeding $166 billion.
This confirms that Africa’s new demographics have plenty to offer:
- the continent accounts for about 40% of global reserves of natural resources;
- 60% of uncultivated agricultural land;
- a billion people with rising purchasing power; and
- a huge labour force.
In addition, Africa is home to several of the world’s fastest-growing economies and the youngest population. And taken collectively, these economies have a bigger middle class than India. Many of its most rapidly expanding nations do not rely on natural resources, with nearly two-thirds of growth last year coming from strong consumer spending. And almost half its citizens now live in cities.
Countries are losing out on the new “Scramble for Africa”. This time the scramble is for trade.
Opportunities in Africa
The continent offers opportunities beyond natural resources, land and labour power. We do not have to dig too deep to see that there are a lot of “fast expanding markets” and pockets of excellence within the continent.
One such opportunity comes from the retail sector. According to a recent report, several countries represent a vast market space for retail.
In Gabon, for example, the report suggests that with a GDP per capita of $21,600, the country’s newly formed middle class offers significant opportunities to foreign companies, particularly as the domestic retail sector is highly fragmented. Smaller nations such as Botswana and Angola are also offering more and more opportunities.
This story also pans out on a larger scale. Nigeria, with its population of 178 million, has a somewhat underdeveloped retail sector. According to the report, modern supermarkets made up only 1% of all shopping expenditure as the market remains dominated by informal shops and convenience stores.
Another source of opportunity for foreign businesses comes from the way that cultures and habits are changing. The exceptional economic growth of Nigeria, for example, has allowed for greater consumption, especially for status symbols and products that symbolise “tickets to middle class membership”.
From our own research, one of the products that has substantial growth, perhaps somewhat unexpectedly, is champagne imported directly from France. Expenditure grew at an average of 26% between 2007 and 2012. A recent slowdown still leaves significant growth, forecast at 12% a year to 2017.
An important point here is that luxury food and drinks products are emblematic of an important cultural shift towards a more sophisticated kind of consumption.
In a recent speech, the CEO of a leading communications agency pointed out that Nigerians, especially the wealthy, do not only shop for themselves. They also shop for others in their families as a way to display their reflected status. As the country becomes more affluent, we can expect more and more expensive high-end products coming into the market to please an expanding and increasingly demanding middle class.
For many years, Apple viewed Nigeria as too poor to be an attractive market. This opened the way for Samsung to become the mobile telephony leader in Nigeria.
How did the South Korean company do it? It realised that even though the country is relatively poor — with GDP per capita of only $3,000 – members within a family can easily collect funds from others. In this way, even cash-strapped teenagers can quickly accumulate enough from richer relatives to buy expensive mobile phones. The result: some 70% of high-end mobile devices are sold to people in lower income households.
The Lucozade story is also instructive. It became the leader of the Nigerian drinks market by understanding when and where it would be needed and appreciated by people. Having its chilled energy drinks sold at the roadside increased its popularity among professionals who were often spending long hours in traffic jams. The drink became associated with providing refreshing moments.
These observations may be anecdotal, but they demonstrate an important point: it would be unwise to ignore African markets based on economic statistics alone. The key is to try to understand particular markets, often working with local specialists.
A third source of opportunity is that African countries can also be sources of innovation. One of the most well-known and successful innovations is M-PESA.
Started in 2007 by Kenya’s largest mobile-network operator, M-PESA enables people to transfer money between each other using their mobile phones. They can also use their mobiles to withdraw cash at corner shops.
The scheme has become extremely popular due to the high costs of sending money and also because it offers a safe way to store money. Interestingly, the benefits go beyond mere convenience. A study found that rural Kenyan household income has risen by 5%-30% as a result of adopting M-PESA.
It is also claimed a range of start-ups have been founded in Nairobi on the back of M-PESA’s operations.
As cultural and dynamic aspects of consumers are so different in Africa, it is very likely that we will see more innovations emerging from this part of the world.
So, while it has been easy to dismiss Africa in the past as a place that is, at best, a provider of basic commodities, land and labour, a closer look reveals that it is not hard to see that opportunities are aplenty and just waiting to be tapped into.
Professor of Business & Economics at Grenoble Ecole de Management and Harvard Extension School, Harvard University
Associate Professor of Finance / Head of Competitiveness Studies at i7 Institute for Innovation and Competitiveness, ESCP Europe